eRate bust signals crackdown

From eSchool News staff and wire service reports

January 10th, 2003

At least 26 cases of suspected eRate abuse are currently under investigation by the Federal Communications Commission (FCC), eSchool News has learned. The widening probe follows a criminal complaint against an eRate service provider who had been working with as many as 200 schools in New York.

As part of a concerted effort to crack down on abuse of the eRate program, federal authorities on Dec. 18 charged the owner of Connect2 Internet Networks Inc., a New York-based internet services company, and three employees with allegedly defrauding the eRate of millions of dollars.

The case marks the first time criminal charges have been filed against anyone for allegedly abusing the $2.25 billion-a-year federal program, which provides discounts to schools and libraries of between 20 percent and 90 percent of the cost of telecommunications services, internet access, and internal wiring.

eSchool News first broke the story on Nov. 8 that Connect2 might be one of several companies under investigation by the Schools and Libraries Division (SLD) of the Universal Service Administrative Co., the agency that administers the eRate, for possible violations of the program’s rules. (See “New eRate tool IDs questionable vendors,” http://www.eschoolnews.com/news/showStory.cfm?ArticleID=4072.)

Prosecutors allege that company owner John Angelides and employees John Dotson, Gary Blum, and Oscar Alvarez made phony invoices, “dummy” checks, and falsified other paperwork to bring computers and other equipment to four New York area schools. Specific allegations were not reported regarding Connect2’s other education clients.

Under the rules of the eRate, schools must pay at least 10 percent of the cost of equipment they purchase. The men promised the schoolsoften in writingthat they would pay nothing to take advantage of the program, court documents say. Sometimes, the men asked school officials to make bogus paymentsusually for tens of thousands of dollarsto make it appear as if the schools had paid their share.

The money allegedly was funneled back to the schools. In one instance, Connect2 reportedly refunded a check by handing a school administrator an envelope containing $20,000 in cash.

Prosecutors also allege that during an FBI investigation, Angelides and Alvarez tried to conceal incriminating evidence and urged two administrators at Islamic Elementary School of South Ozone Park, N.Y., to lie to investigators.

Connect2 has been an eRate service provider for more than 200 schools since 1998 and has received more than $9 million in federal funds under the program, the complaint said.

Lawyers for the four men declined to comment on the charges, which include conspiracy to commit wire fraud, making false claims on government programs, making false statements, and obstruction of justice. The men appeared before U.S. Judge Kevin Nathaniel Fox Dec. 18 and were released on bail.

SLD officials also declined to comment because the case is still under investigation.

Cracking down

The charges filed against Angelides and the other Connect2 employees are the latest in a series of events that suggest the SLD and federal authorities are trying to crack down on widespread abuse of the eRate, particularly as it relates to the program’s competitive-bidding requirements. School leaders applying for funds from the 2003 program year and all future years should make sure they follow the program’s rules, or they’ll risk being denied funding, eRate officials said.

On Dec. 3, SLD issued a warning about a pattern it had found in certain 2002 applications that allegedly failed to follow the program’s competitive-bidding requirements. The warning said SLD had identified a number of problematic applications associated with one service provider in particularlater identified as IBM Corp.and that the agency already had denied one of these applications, while others still were pending. (See “IBM in crosshairs as SLD targets eRate infractions,” http://www.eschoolnews.com/news/showStory.cfm?ArticleID=4116.)

Around the same time, the FCC’s Office of Inspector General (OIG) released its semiannual report highlighting its investigations for FCC commissioners and members of Congress. The report indicated that OIG currently is tracking 26 investigations of suspected eRate abuse, 16 of which were initiated in 2002. The cases being tracked range in dollar value from a $4,000 false-statement case to several cases involving “hundreds of millions of dollars,” according to the report.

The report said OIG has enlisted the help of the FBI’s Governmental Fraud Unit and the Justice Department’s Antitrust Division to assist in these and all future investigations. “Many of the cases being referred for investigation alleged that no competitive procurement process took place and that, as a result, the cost of the goods and services was inflated,” the report said.

Competitive-bidding violations are the reason for SLD’s scrutiny of IBM, although there is no evidence to suggest at this point that IBM officials have engaged in any criminal wrongdoing. A story in the El Paso Times identified the Ysleta Independent School District of Texas as the district whose 2002 eRate application was denied because its relationship with IBM allegedly undercuts the program’s rules on competitive bidding.

In denying Ysleta’s $18 million application, the SLD wrote:

“The record reflects that the overriding goal of the IBM-Ysleta relationship is to maximize the … funding, not necessarily to promote educational goals that have been clearly defined in a technology plan. … Nor is the approach here consistent with the requirements to choose the most cost-effective alternative to achieve objectives.”

The agency also charged in its denial letter that Ysleta’s application appeared to be copied from another district’s request.

The SLD’s web site reprimands unnamed districts for using a cookie-cutter approach to applications: “SLD has found nearly identical language in [requests for proposals] from a variety of applicants that resulted in awards to the same service provider.”

For example, the El Paso Times reported, the El Paso Independent School District’s 2001 eRate request says of technical maintenance: “The purpose of these roles is to provide call-in and dispatch services, help desk functions, and technical support for EPISD personnel as related to support of the EPISD network.”

An excerpt from Ysleta’s 2002 statement says, “The purpose of these roles is to provide call-in and dispatch services, help desk functions, and technical support for Ysleta ISD personnel as related to support of the Ysleta ISD network.”

Nationwide, SLD has not yet decided on almost $1 billion in requests from districts that propose to use IBM as their service provider, according to an analysis by eRate consulting firm Funds for Learning LLC. At press time, it was still unclear how much of this $1 billion figure might be denied.

About $387 million of that is from Texas school districts, including about $180 million from the Dallas Independent School District, $87 million from the Fort Worth Independent School District, and $29 million for the Donna Independent School District, according to an El Paso Times review of SLD databases.

In the Dallas school district, Associate Superintendent Ruben Bohuchot said he doesn’t think his district will be denied funding. He said Dallas differs from other school districts that used IBM as a strategic partner in that it advertises each bid for technology equipment and services through the Texas Cooperative Purchasing Network, not IBM.

“When I got a call from SLD, I was nervous for about an hour,” said Bohuchot, who heads technology programs for the Dallas ISD. “But I read in great detail what they were objecting to. As I read it I kept thinking to myself, ‘We didn’t do that.’ One thing SLD is really concerned about is lack of competition, and ours is the complete opposite of that in that everything is going to be bid.”